Upgrades in key stocks could add steam to current rally

In last one month, HDFC Bank, HDFC, RIL, HUL have had their 12-month price targets upped 10-15%

Although the benchmark Sensex and Nifty indices have rallied 15 per cent since the beginning of 2017, there could be more room for further upside, going by analysts' projections.

In the last one month, index heavyweights like HDFC Bank, HDFC, Reliance Industries and Hindustan Unilever have seen their consensus 12-month price targets being upped between 10 and 15 per cent. Interestingly, the increase in price target was despite some of these stocks climbing to record-high levels.

An analysis of consensus price targets for Sensex components indicates an upside of up to 10 per cent in the medium-term for the index. The Sensex on Monday closed at 30,571, having gained 15 per cent since the start of the year and 21 per cent in the past one year.

The sharp gains notwithstanding, analysts see further upside in all Sensex components, barring just six. According to data compiled from Bloomberg, one-year target prices of all the Sensex companies, barring information technology (IT) and pharma sectors, have been upgraded in the last one month.

Experts say improving macro-economic indicators along with revival in corporate earnings is the key reason behind the sharp rise in the target prices. Global economic outlook too is supportive, they add.

According to Ridham Desai, managing director, Morgan Stanley India, although the current rally has not been logically driven by improvement in fundamentals, this rise in Indian stocks is not completely irrational given the positive outlook.

"The growth cycle is turning. This could be the beginning of a new growth cycle. Earnings could compound at 20 per cent over the coming five years. Rising demand for equities from domestic households and potential M&A (merger and acquisition) activity would also push the markets in the coming months," Desai added.

Not just individual stocks, but most brokerages have started to upgrade the year-end targets for the benchmark indices. Morgan Stanley recently increased its bull-case target for Sensex to 39,000 from 33,000 earlier.

Incidentally, during the start of the year, most brokerages had set modest year-end targets, which have already been achieved.

The current rally has taken many of the analysts by surprise as they were expecting a relatively muted performance in the first half of 2017 due to possible impact of demonitisation on the corporate earnings and global factors like aggressive protectionist policies. However, markets emerged out of the red zone quicker than expected thanks to impressive flows from institutional investors-both foreign as well as domestic.

Foreign institutions have pumped more than $7 billion (nearly Rs 45,000 crore) so far this year, while domestic mutual funds too have bought shares worth Rs 22,700 crore, stock exchanges data showed.

Analysts expect divergence in stock performance among companies with retail and consumption related stocks doing well, while technology and pharma could be an overhang on the index. There are seven companies representing these sectors in the Sensex and most of them have seen a downward revision in the target price in the last one month. Analysts see an average downside of around five per cent in these stocks.

"There is going to be a sector wise divergence not just in the stock performance but also in terms of earnings. India is essentially retail and consumption story and companies from these sectors are expected to do well. On the other hand, the changing global scenario could impact the performance of IT and pharma companies," said Sunil Shah, head of research, Axis Securities.

Another key factor to consider would be the global commodity prices. The uptick in global oil and metal prices has helped large commodity-focused companies register a superior performance.

An unexpected slump in commodity prices due to global factors could hurt earnings potential of these companies, experts warn. Companies such as Reliance Industries, ONGC, Coal India and Tata Steel would feel the impact of any such fall.